U.S. indexes are slightly lower this morning despite strong earnings from Disney after the S&P 500 index just missed hitting 5,000 for the first time yesterday. Investors look ahead to PepsiCo earnings tomorrow and inflation data next week.
Rising Treasury yields threaten chances for S&P 500 to claw above 5,000
Initial weekly jobless claims come in as expected, with continuing claims dropping
Disney shares spike after strong earnings report, with PepsiCo awaited tomorrow
(Thursday market open) After halting just short of 5,000 yesterday, the S&P 500® index (SPX) opens Thursday threatening to march through that round number as investors digest a bullish earnings report from Walt Disney (DIS) and await next week’s key inflation data.
While 5,000 is just a number and major U.S. indexes retreated slightly ahead of Thursday’s open, there’s no denying the symbolic impact of piercing it. These things can take a while. Back in 1999 when the Dow Jones Industrial Average® ($DJI) approached 10,000 for the first time, many U.S. floor traders busted out their “Dow 10,000” hats only to have to put them away again multiple times before the index finally burst through.
“If we experience some volatility around this round number, it shouldn’t be a surprise,” said Nathan Peterson, director of derivatives analysis at the Schwab Center for Financial Research.
“What happened with Dow 10,000 could happen with the SPX, too. I still think in technology we are setting up for a 3% to 6% pullback at some point, given February’s reputation for weakness, we just don’t know the timing of it. Maybe post-Nvidia (NVDA) earnings would make sense.” The giant semiconductor company reports February 21.
After today’s Weekly Initial Jobless Claims and December Wholesale Inventories data, the market enters a bit of a numbers doldrum that extends through Monday, at least for U.S. economic metrics. Tuesday’s January Consumer Price Index (CPI) data provides the wake-up call (see more below).
Federal Reserve speakers so far this week echoed Fed Chairman Jerome Powell’s oft-repeated message that the central bank needs to see more evidence of inflation receding sustainably toward the central bank’s 2% long-term target. There’s only one Fed speaker today after a host the last two days, but Richmond Fed President Thomas Barkin speaks not once, but twice, this morning. Today’s calendar also includes several Treasury auctions.
Mega caps continue to set the pace, with the entire “Magnificent Seven” gaining yesterday amid what Briefing.com called a “resilience to selling interest.” Market volume has been below average this week, but advancers led decliners Wednesday at the New York Stock Exchange (NYSE).
Futures based on the SPX dropped 0.17% shortly before the close of overnight trading. Futures based on the $DJI were flat, and futures based on the Nasdaq-100® (NDX) fell 0.2%.
The Treasury market remained under pressure early Thursday after a slight recovery Wednesday from its worst two-day stretch since June 2022. Yesterday’s slide in yields following strong demand for a hefty 10-year Treasury note auction appeared to boost Wall Street’s sentiment, but rising yields again this morning could pose a barrier to any attempts at SPX 5,000.
Another potential barrier is crude prices, which rose again Thursday as hopes for a Middle East peace agreement faded and U.S. gasoline stocks fell.
Weekly Initial Jobless Claims of 218,000 fell slightly from an upwardly revised 227,000 the prior week, the U.S. government said Thursday. That was right in line with the Briefing.com consensus. Continuing claims slipped to 1.871 million from a revised 1.894 million the week before. None of the data looks particularly market moving.
Continuing claims continue to bear watching for signs of how difficult it might be to find a new job. The last few weeks featured several high-profile layoff announcements, and employees who lost their jobs might start showing up in the weekly data.
Overseas, news from China continued to look sour as CPI there fell 0.8% year over year in January, worse than expected and the fastest decline since September 2009. It’s the fourth straight month of deflation. The downward trend in prices is ringing alarm bells for the slumping economy, even as officials step up support. However, much of the weakness reflects the property sector and regulatory issues, with stimulus measures having little impact. Meanwhile, Japan’s stock market is near its record 1990 highs.
If the $DJI climbs today, it might want to thank member Disney, which enjoyed 8% gains in premarket trading as earnings per share (EPS) and guidance surpassed Wall Street’s consensus.
The market’s sunny reaction reflected several factors, including fiscal Q1 progress toward profitability at the company’s combined streaming business, a new share repurchase program, a dividend increase, and being on track toward meeting or exceeding its $7.5 billion annualized savings target by the end of fiscal 2024. While Disney+ streaming subscribership fell as the company had previously warned, it wasn’t as big a decline as some analysts had feared at 1.3 million. That came amid higher pricing for the product.
Streaming losses fell by $300 million in fiscal Q1, and Disney expects to add 5.5 million to 6 million subscribers to Disney+ Core subscribers (which includes U.S. and Canada customers and international users but excludes India-based Disney+ Hotstar) during the current quarter that ends March 31. Disney+ Hotstar added 700,000 subscribers last quarter.
Disney said in its conference call it expects to be profitable in its combined streaming business by the end of fiscal 2024. On the less sunny side, Disney’s Entertainment and Linear Networks divisions both posted year-over-year revenue declines last quarter.
Transportation shares rose Wednesday behind gains in trucking companies like XPO (XPO), which rallied 18% after reporting stronger-than-expected earnings. The Dow Jones Transportation Average (DJT) climbed 0.42% to end at its highest level since mid-August. Consumer discretionary and semiconductor shares also ranked among the strongest sectors.
Stocks on the move early Thursday include:
Data resurfaces next Tuesday with the arrival of January’s CPI, and early expectations hint at marginal progress on that front. The Fed will likely examine the data closely for more signs of price growth continuing to slow. Analysts expect monthly core CPI of 0.3%, the same as December’s report showed. They also expect a slight improvement to 0.2% for headline CPI from 0.3% in December, according to Trading Economics. Core CPI strips out volatile food and energy prices.
Speaking of energy, crude oil is on pace for its third weekly gain in the last four after the U.S. Energy Information Administration (EIA) said earlier this week that U.S. crude production growth could be lower than it previously forecast. Still, U.S. output remains at record highs, offsetting price support from tension in the Middle East.
Airlines and other transport-related companies often are first to feel the heat of rising energy costs, so Expedia’s (EXPE) earnings after the close today bear watching for travel industry dynamics.
Tomorrow’s earnings spotlight shines on PepsiCo (PEP), which is named for its iconic drink but also is a big player in snack foods. Results from PEP and rival Coca-Cola (KO), due next week, can be a good barometer of consumer health.
Early today, futures trading pegged chances at 18.5% for the FOMC cutting rates by 25 basis points following the March 19–20 meeting, according to the CME FedWatch Tool. The market prices in around a 64% chance the funds rate will be lower than now after the Fed’s May meeting.
Margin spotlight: Earnings have beaten expectations so far, but revenues registered a relatively low “beat rate” as of earlier this week, bringing profit margins into focus. They’re down following a three-quarter uptrend, note Liz Ann Sonders, Schwab’s chief investment strategist, and Kevin Gordon, senior investment strategist at Schwab, in their latest post.
Ideas to mull as you trade or invest
Dollar doldrums over? This week’s dollar rally to two-month highs came after weeks of marching in place. Until the Fed adopted a more hawkish tone and tempered market hopes for a March rate cut, the U.S. Dollar Index had traded mainly between 103 and 104 early this year as traders balanced the bullish impact of robust U.S. economic data with the bearish one of potential near-term rate trimming. The 103-handle, to use market parlance, was roughly in the middle of last year’s tight trading range that mostly stayed between 100 and 105. Historically, even 104 or 105 isn’t high compared with peaks near 115 in 2022. Still, a sprinkling of S&P 500 companies recently cited dollar strength as a possible headwind. Firms in sectors like tech and materials with a high percentage of overseas sales often get clipped by a firm greenback. On the plus side, a strong dollar can ease U.S. inflation by making imported products cheaper.
Small cap, big growth: Large-cap Q4 earnings have generally been better than expected, and S&P 500 earnings growth is seen swinging from 3.6% in 2023 to nearly 10% in 2024, according to London Stock Exchange Group (LSEG). The swing could be even more dramatic for the small cap Russell 2000® (RUT) index, where LSEG sees earnings climbing from –11.4% last year to +26.5% this year. That suggests opportunities outside segments like the Magnificent Seven, but with caveats. “As an important aside, when moving down the market-cap spectrum, it’s advisable to stay up in quality and look for profitable companies with strong cash flows, healthy balance sheets, ample interest coverage, and lower volatility levels,” said Schwab’s Gordon. As a reminder, many small-cap firms have no earnings to speak of, something to keep in mind when contemplating an investment.
Want a drink with that? Earnings tomorrow from PepsiCo and from Coca-Cola next week come after McDonald’s (MCD) executives noted in their call Monday that “inflationary headwinds” created challenges for customers. With PepsiCo and Coca-Cola, there’s a slightly different dynamic. Many people buy soft drinks and snacks at stores, others get a beverage to accompany their burger and fries, and there’s also a huge market for these products at bars, restaurants, stadiums, and theaters, all of which thrived the last two years as people went back out after the pandemic. Demand for these away-from-home events still looks strong, per recent ISM Services and jobs and wages data, suggesting higher-income customers flocking to NFL playoff games and Taylor Swift concerts can still afford plenty of Pepsi and Coke to quench their thirst. Meaning these companies don’t necessarily deal with the same dynamics as McDonald’s and other fast-food outlets.
February 9: Expected earnings from PepsiCo (PEP).
February 12: No major earnings or data expected.
February 13: January CPI and Core CPI and expected earnings from Biogen (BIIB), Coca-Cola (KO), Hasbro (HAS), Airbnb (ABNB), and Lyft (LYFT).
February 14: Expected earnings from Occidental Petroleum (OXY), Kraft Heinz (KHC), and Cisco (CSCO).
February 15: January Retail Sales, January Capacity Utilization, January Industrial Production and expected earnings from Deere (DE) and Roku (ROKU).
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